Ladies and gentlemen, good afternoon, and welcome to the Redwood Trust, Inc. Third Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood's Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today for our third quarter 2023 earnings conference call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's Annual Report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we might also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our third quarter Redwood Review, which is also available on our website redwoodtrust.com. Also note that the content of today's conference call contain time sensitive information that are only accurate as of today. And we do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded and will be available on our website later today. I'll now turn the call over to Chris for opening remarks.

Thanks, Kait, and welcome everyone to Redwood's third quarter earnings call. There is no question that our markets are in a state of transition, impacted by the final throes of a hyper aggressive Fed policy, ongoing geopolitical strife and proposed regulatory rule changes that will usher in a new era of housing finance. In the third quarter, the gravitational pull of an inverted yield curve continued to take its toll on the mortgage sector, particularly on the market values of fixed rate portfolio investments. Redwood's GAAP book value was down 5% for the third quarter, largely a mark-to-market adjustments directly attributable to the rapid rise in the 10-year treasury that took place in the final month of the quarter. Since quarter end, we estimate our GAAP book value to be down approximately 2%. For those in our sector who have already reported their third quarter results, GAAP book values have been down 8% on average. Trying to make sense of this market and see through the fog [ph] of 8% mortgage rates is difficult for any of us, especially given the prospect of an extended period of higher for longer benchmark rates as the economy continues to outpace expectations. With housing affordability at the lowest levels we've seen since the 1970s and transaction activity at multi year lows, many market participants have simply retreated to the sidelines. In fact, as we head towards year-end, we've already started to see the same diminution of market activity that we observed a year ago. That's why it's so important for us to keep our shareholders apprised of the transformational changes that we expect to become prominent in the coming months. Our perspective is informed by 30 years of cycles and market turns and learnings from things we've gotten wrong or missed, in order…

Thank you, Chris. I will now cover details of our operating platforms and investment portfolio during the third quarter before turning it over to Brooke to discuss our overall financial performance. As Chris highlighted in his opening remarks proposed changes to the bank regulatory capital regime, while far from final are turning into the tailwinds we expected for our residential mortgage banking business, in many cases ahead of schedule. While, we believe we are still in the early innings of this sizable market shift, it is clear that business models are evolving quickly, with important ramifications for how 30-year mortgage risk is funded and hedged. As always, our team has been already enabled partner. Third quarter loss for $1.6 billion close to triple second quarter production with approximately 40% of this volume coming from depositories. Since March, our residential team has engaged with depositories from coast to coast, onboarding new partnerships and bringing our total count of active seller relationships to 185 and growing. This group now includes over 70 banks, including some of the nation's largest regionals and large financial institutions, many with assets over $200 billion in extensive mortgage origination footprints. Several of these institutions have just commenced lock activity with us in recent weeks, implying an attractive runway for growth notwithstanding persistently higher rates. In fact, our locked pipeline in Q3 carried some of the strongest credit characteristics we've seen in recent years. 772 Fico 72% LTV and 33% debt to income ratio. In keeping with the momentum we see for the business, we nearly doubled Our capital allocation to residential mortgage banking in the third quarter and expect that allocation to grow further heading into 2024. Our estimated share of overall jumbo production in the third quarter approach 4% Well above our historical 2% to 3%…

Thank you, Dash. We reported earnings available for distribution or EAD of $11 million or $0.09 per basic common share as compared to $16 million or $0.14 per share in the second quarter resulting in an EAD return on common equity of 4.3%. The decrease in EAD was primarily due to lower net interest income from bridge loans and our investment portfolio inclusive of a higher balance of loans and inter nonaccrual status in the third quarter. We anticipate significant recovery of the associated interest going forward and expect an interest income to trend higher beginning in the fourth quarter. The decrease in net interest income was partially offset by higher mortgage banking revenues on the quarter, which increase over 20% versus Q2. Adjusted for acquisition related intangibles, our combined mortgage banking businesses generated an 11% after tax return on the quarter. Income from residential mortgage banking activities increased $2 million on the strength of higher volumes, attractive execution on our securitization activity and overall market risk management. We were well hedged against basis exposure on our growing pipeline throughout the quarter and benefited from a steepening of the yield curve. As a result, margins were 80 basis points which is in line with our target gain on sale. Income from business purpose mortgage banking activities increased by $1 million, driven largely by the accretive term loan securitization financing that Dash described. G&A expenses decreased by $1 million from the second quarter as our operating businesses were able to demonstrate efficiencies on higher volume. Both residential and business purpose mortgage banking saw a decrease in cost per loan, declining to levels that we believe support profitable growth going forward. G&A also declined in part due to lower expenses associated with performance-based long-term incentive compensation. GAAP net income related to common…

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Hey, everybody. Thanks for taking my question this afternoon. I'd like to talk a little bit about the origination and environment. Obviously, it is skewing pretty significantly towards purchase, not a surprise, underlying that we're also seeing a skew towards new home purchase because of the lack of availability of inventory. I'm curious if you're seeing any disruption or dislocation associated with home builders providing subsidized financing in order to drive volume in this environment.

Hey, Rick, it's Chris. I don't think so. The housing market has been surprisingly stable in recent months, and I think that in our markets, we actually did have a small amount, 20% or so a recent locks have been refi, some of that has to do with bulk pools will be purchased. But by and large, it is a purchase market. I think the fact that active listings are half of what they typically are historically as a big part to do with a stable housing market and the rate concessions from the homebuilders have not, at least from our perspective, impacted our book or what we're seeing.

Got it. And, Chris, with that in mind, obviously, the big opportunity, and you guys have been clear about the impact of Basel III and the opportunity that creates. Does it make sense to also partner with the homebuilders? I don't know. And again, for as long as I've known you guys, it's not anything I've ever thought about or asked about. But do they make -- do the home builders make sense as channel partners as well?

They certainly could, Rick, and this is down. I mean, in the history of the jumbo business we have, we have done some of that. We do have sellers that have smaller homebuilding ventures that we have actually done business with in the past. The other opportunity that comes out of what you're articulating is with BPL. I referenced it in the prepared remarks briefly, but we are still seeing a lot of homebuilders either pivot to -- from for sale to for rent strategies themselves, or move that inventory to other clients of ours who are looking for financing. So we are starting to see more of that. It's a product that's gotten more and more interest here as the homebuilders are looking to continue to diversify and address some of the just overall financing challenges that you're referencing. We really liked that risk because as you know, in that case, the construction is done, we don't finance those until certificate of occupancy is in hand. So that's actually been a reasonable part of the BPL pipeline here the past quarter. So that's definitely another opportunity off the back of some of the trends you're articulating.

Got it. Hey, Dash. Thank you, Chris. Thank you very much, guys.

Thank you.

Thanks, Rick.

Thank you. Our next question comes from Bose George with KBW. Please go ahead.

Hi, everyone. Good afternoon. I want to ask how does resi lock volume? How did that look in October, and did this move up in interest rates persist? Now how do you think that could impact volumes, industry jumbo volumes in 2024 versus this year?

Good question, Bose. I think the pace of play in October has been pretty consistent with the latter part of Q3. So we're -- we've been pleased with the daily lock flow. I think that's notwithstanding higher rates. I think, again, that's driven by the fact that our bench of sellers is deepening, number one. And number two, we're adding wallet share here with the folks that were already -- had already been penetrated with over the past few quarters. Certainly, rates continuing to trend up well, continue to impact the size of the overall pie. I think we've been really pleased, frankly, with the credit quality of the loans we've been locking, as I mentioned in the prepared remarks, some of the best credit profiles we've seen in quite a while at rates that are at or touching 8% [ph] [technical difficulty] perspective at this point. So we'll see how it evolves. But I think we've been pleased with the recent trends, and October is on pace with the latter part of Q3.

Yes, Bose, I'd add just another way of expressing that. The jumbo borrowers certainly what we've seen from an underwriting standpoint, they were well qualified with a 3% tenure, and they're well qualified with a 46 tenure. So I don't think we've seen much in the way of slower volumes, especially for purchase activity, but we'll have to wait and see if things right out.

Okay, great. That's helpful. Thanks. And then can you talk a little bit about the bulk purchasing opportunity? Do you think this could end up being fairly meaningful? How do the economics compare with your regular flow business?

We continue to be optimistic about those continuing to come out, Bose. I think we're a particularly strong bid for ball for a few reasons. Number one, just our operational history with more and more of the sellers has being around the hoop on a flow basis, we think positions as well. To be a helpful partner to those sellers when it's time to explore a bulk sale. As we talked about those types of loans [indiscernible] discount have pared particularly well in [technical difficulty] securitization. So I think we naturally have a pretty strong bid for those types of loans to complement our on the run, or on the run production. So it's definitely a big opportunity. I think, certainly, obviously, with the evolving capital rules that will be a big deal. If we see a little bit of a rally in rates from here that could unlock more frankly, as dollar prices trend up a little bit typically for those that may not be hedging their positions on more seasoned loans. So it definitely moved the needle. And frankly, we think is the banks in general start to get their head around the rules. And frankly, they get more at bats with us on the flow side. That will make the bulk opportunities hopefully come with even more speed than they have over the past quarter or so.

Okay, great. Thanks a lot.

Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please go ahead.

Hi. Can you talk about your credit outlook for the BPL investment portfolio? Delinquencies improved a little bit this quarter, but I guess you're doing some modifications. And are borrowers having a lot of success in terms of going from variable to fixed, is that kind of working out well?

Yes, good questions. I can take that. I think at the -- starting at the high-level, I think a lot of the trends we're seeing this quarter are consistent with ones we've been speaking to the past quarter or two. I think in general, business plans are going fine. We are seeing pockets of stress with sponsors, some of whom have been able to bring additional capital to the table to rebalance. And other situations, frankly, Don, where it's been the right project, but the wrong sponsor and we've had to bring in outside equity. And I think we've been pleased with the speed with which we've done that. Just to give you a sense for the speed of resolution, in terms of the 90 plus book at the end of June, we've worked through over half of those loans at this point, either explicitly or are in contract and expect to be have the rest of that book resolved by the end of the year. In terms of our REO position, our REO is at 9.30 over 90% of those are either sold or in contract. So I think we've been pleased with the speed of resolution. In terms of your question, floating effects, yes, that's obviously a priority for most borrowers in the market to see if they can get to the right level of stabilization to take out a traditional fixed rate term loan. The recutting of deals we did in the quarter were largely floating to fixed where we still were able to maintain approval rates 9% or so. So definitely still healthy average accrual rates there. So in general, like the support levels and the tailwind for rents are still there, and we've been pleased with our ability to, in general, move on from situations where we didn't have the right sponsors in the projects and or bringing fresh equity from sponsors that we felt were still viable to continue. So asset management remains a big focus for us, notwithstanding the fact that we're still very constructive on rents. We do expect this work to continue in the coming quarters, just given the overall environment. I think it helps us that. We are generally focused in markets where we have a pretty deep [indiscernible], and if a sponsor doesn't work out, we can bring in someone else, we've had very good success with that over the last quarter or two. And I would expect some of that to continue going forward.

Thank you.

Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good afternoon. First of all, I start with the jumbo side, clearly a big opportunity. And Chris, appreciate your comments to beginning about being able to gain market share. When you think internally and when you guys model out internally, looking 3 to 4 years out, how much market share do you think you can have? What type of volume is that? You mentioned some things in the comments maybe third-party capital helping funding a lot of the securities retained similar to what the JV is on the BPL side. So can you talk about maybe what's your 3 to 5-year vision as of how the jumbo business plays out?

Sure. Well, this will be somewhat riddled with assumptions. But we are -- we do think that some form of these capital rules will go into effect, I think most of our bank partners think that as well. Our strategy, which is a little nuanced is basically helping banks preserve and or grow market share. So we don't necessarily think that bank share needs to be seated to the independence per se, although we have great business relationships there as well. But to the extent we can work as a capital partner with large banks, we think there's a lot of wallet share there as Dash mentioned. It's basically been locked up since the great financial crisis. These loans have gone into portfolio, they have not come out to markets, and we talked about market share, it really hasn't been an opportunity for a while. And so that piece of the business is what excites us the most currently, and to the extent that we can unlock some of that, and a good percentage moves from originate to distribute. We look at years like 2021, for instance. And we sort of peg those as launch points to what the platform is capable of doing. We're still in single digits range as far as market share goes. We've got a lot of upward mobility. We will need capital partners, we're focused on JVs, we're focused in -- thankfully, we've got a lot of interest. So we want to scale the right way. That's why we made the comment that we're not going to chase volume in this environment, especially as rates are continued to be very, very stubborn. But we do think there's a marking this volume is a key aspect of our strategy. And that's why we keep talking about it. That's why we're so focused on facet of the jumbo market that there really hasn't been accessible in a number of years.

Appreciate the comments there, definitely seems like a real opportunity ahead of you here working with the banks. To follow-up on the BPL side, I think from answer to Don's questions, it sounds like you can sort of work through 90-day delinquencies in about 6 months. Seems like REOs are processed fairly quickly. Can you talk about that REO resolution process? Is there capital infusion there? Or do you sell as is? How do you think about losses there or potentially gains on liquidations? How quickly that can take place?

Sure. In general, what we try and do, obviously, is avoid getting to REO at all. That's the thing gets reflected in the relatively low percentage that gets there. But I think where we've had the most success, frankly, is having a plan going in, it's being able to have sponsors lined up that we know are going to have interest in the properties. And once we take it back, we will sell it as quickly as possible. Depending on the particular project, selling it as is, as most efficient, we've been able to do that with a number of these where they just -- where we had cash buyers and just moved on. In many cases, getting out flat to up a bit depending on the situation. I think with some of the other projects, it's helpful, frankly, to have a sponsor also lined up where we could potentially provide some financing as well. Bringing a new sponsor who's buying at a level that makes sense and provide some financing. And then that loan goes back on our book with fresh capital and fresh and fresh operations, which is helpful. So it sort of depends Stephen on the outcome, but as always trying to get as far ahead of the situation as possible to be able to have buyers lined up and get those properties in the right hands as quickly as possible.

Hey, Stephen, it's Chris. I'd also add just from an accounting perspective, most of our peers that uses some form of cost accounting, certainly for BPL loans, commercial loans, non-QM loans, and we continue to use fair value. And so, what the impact there is as rates are going up, and the credit environment is getting tougher, I think what we're pushing through the P&L encompasses potentially more than just the credit component. We've got the rate component, we've got the average life component. So it's not necessarily an apples to apples comparison and we'll try to do a better job of -- as these mods go through of what's actually recoverable, because there's a fair amount that is, especially as Dash mentioned, you get fresh sponsor capital, or new sponsors in place. These are good projects, and it's been a tough rate environment. But I think the extent we can work on these, there's quite a bit of potential upside for successful

Appreciate you highlighting that. And lastly, if I can squeeze one more in. Looks like a couple of securitizations, or deals since quarter end. Can you talk about market reception kind of what kind of gains or margins you saw on that and a lot of rate volatility here we've seen recently as you guys noted in your remarks.

Yes, the big one was our fourth liquidity of the year, which we just closed about a week ago. We got really strong receptivity to that. I would say from a margin perspective, it's supportive of margins that are probably consistent with where we landed in Q3 overall. The fact that the curve has uninverted significantly has certainly been helpful. We've been able to place bonds to -- a real variety of investors we have a lot of insurance companies and money managers in those books, which we've been pleased with. So definitely supportive of staying within the range of our long-term margins, which has been helpful. Part of it also, Steve, we've been selling higher and higher pass through coupons and have been getting good receptivity. So, on his last Sequoia deal, we sold 6% AAA bonds, which price at a very slight discount to par. Just obviously, on a hedge adjusted basis, it was higher than that. We're able to create bond profiles from a convexity perspective that are getting a lot of people in books. We had a few first time buyers as well. We are exploring the right coupon slots for upcoming deals. It's possible we'll sell 6.5 before the end of the year where we see decent liquidity. We were able to manufacture some really nice profiles with obviously very good carry, and more limited extension risk just based on where the dollar prices are. So we've been pleased with that, that notwithstanding the volatility, the execution for Sequoia has remained really strong.

Great. Thanks for the comments this evening.

Thank you. Our next question comes from the line of Kevin Barker with Piper Sandler. Please go ahead.

Thank you. On the BPL portfolio, it's good to see that the 90-day delinquencies have come down. It looks like we've seen a few loans transition to REO. Maybe could you maybe provide a little bit more depth on how that portfolio is performing? Is it possible to maybe categorize some of that portfolio as either like a watch list or classified and how that's developed over the last few quarters? Thanks.

Sure. I think, we measure -- we obviously have a bunch of different metrics in terms of managing the book. Maybe I'll stop short of quantifying the specific buckets, Kevin, but I think we look at a few different key metrics, obviously, payment velocity and delinquency is the one that we talked the most about on these calls and publicly. But the other big thing we look at is just overall, number one, just where the projects are on schedule. So we spent a lot of time focusing on that and making sure that the sponsors are getting up and down, as quickly or if not, and need more time. What that means, number one, for potential extensions and obviously, fresh equity, because obviously, if projects take longer, ultimately, interest expense will go up through time, because of the -- of a longer duration loan. Just to give you some context on extensions, like give or take over the past 6 months or so, we have extended probably 25% to 30% of the book on average. Those extensions range from anywhere from 3 to 6 months. And generally we have not had to extend the second time. We've had sponsors generally get in and out in those timeframes. That's an expected part of the bridge business. It frankly, it always has been even before market conditions have gotten harder. I think we've done a really good job, a much better job, frankly, over the past 18 to 24 months, getting ahead of some of these issues. Being out in front of situations where we're talking to sponsors, 3 to 6 months before their maturity, and we may assess the maturity date well in advance of that actual date. And from our perspective, actually, we think that's healthy, because those points in time, that's the right point in time to do it, again, fresh equity and understand the interest rate that they're in is right, and just really understanding how much more time they need. So I think, Kevin, the biggest thing is time, right? It's just understanding if these sponsors need more time to get these projects done. I think the modifications of the extensions are sort of a good indicia of that, I would say.

So, regard to that market, are you seeing an increasing amount of competition, a decreasing amount of competition? And are you seeing your ability to either increase price on new originations, maybe just a general view on the competitive dynamic within the BPL book?

I think it's pretty dislocated. So Kevin, I think on any given loan, we still will compete with a handful of other lenders who will be aggressive. I think they're unbalanced, though there are a lot of shops that have retrenched significantly or completely, frankly. And one cohort there obviously is the banks. As I mentioned, we are starting to see a lot of loans, whether it's smaller multifamily or build for rent, all day would have been the stomping ground of the banks were those loans are coming our way. So that's definitely a tailwind. But as you know, there's a lot of private lenders in the space. And there's a fair amount of private capital as well. But I think on any given loan, like I said, the competition can be deep, but in general, I think the competitive landscape is probably as good as it's been in the past few quarters, given our overall position, our ability to stand up these capital partnerships, and just there are fewer folks able to lend constructively than there were three or four quarters ago.

Would you categorize this the returns on capital within that business as expanding significantly relative to where it was 6 to 12 months ago? On any new business that you're underwriting?

I think it's mixed. I think on -- I think the -- what we consider BPL mortgage banking, where we are originating and securitizing our term loans. I think those gain on sales are pretty static from where they were a few quarters ago. We were certainly pleased with it. I think that business -- businesses are I think is generally consistent. I think on the overall bridge side, I think, yes, in certain pockets we have seen some tightening bias on loans, just in general because frankly, there are not as many good loans to do as there were a few quarters ago, right. And so, the good sponsors, with a -- for the lower leverage, which obviously is where lenders are, there can be some pricing pressure there. So I think there has been some expansion on are always in the bridge space. I think BPL mortgage banking is probably overall consistent with where it's been.

Thank you very much.

Thank you. Our next question comes from Steve Delaney - JMP Securities. Please go ahead.

Great. Hey, good afternoon, everyone. Some good discussions this afternoon. Chris, I think it was you that mentioned something in the context of some expanding relationships. I believe you mentioned a CRT product, something new that was evolving. Could you elaborate on that a little bit please? Didn't get that rush, that it was you?

It probably was.

Okay.

On CRT, I think, we've been focused with banks on their back books, certainly. And as we've signed up banks, I think we have 50 or more recently approved with a big pipeline behind that. We're getting better access, better visibility to portfolio challenges that they may have. And so we've introduced some structures that we think are pretty straightforward. And obviously, the Fed recently issued some guidelines. And I think there's, to me, the market feels like it's more accepting of some of these structures than perhaps a few years ago. And so, we're definitely open for business there. It is a big capital expenditure. And that's where I mentioned, we are focused on partnerships. So, our business, our franchise is having access to these opportunities. And we're excited to partner with other businesses to fund them -- to fully fund them. But I think the arbitrage, if you will, on lowering risk capital through CRT is very real. And as the real change is going to effect, I think more and more banks, in particular, will look to CRT, potentially via credit link notes to be a solution. Again, that doesn't allow them or doesn't require them to sell the assets, sell the loans and record big P&L charge wise. Yes, they're good loans, right. So they're good loans, they're paying loans. So keeping them on the books and reducing the risk capital is probably the right way to go.

Yes, so maybe cost them -- a little more cost to carry little hit to net interest income, but not the big capital hit for selling the assets off of the discount. So -- thank you on that.

Yes.

We've been highlighting to clients the attractiveness and Redwood goes far beyond 70, whatever it is 75% of book value price to book. And we just use an overused term but we're saying think about the strategic value. I think you went up this with your -- the option value the franchise never hire. So with your permission, I might throw that strategic option value out their forms, see if anybody gets hooked on that one.

Well, you've never needed our permission. So I [technical difficulty] use your judgment. But it is -- we are trying to sift through the noise of rates. It's hard. It's hard on a quarter-to-quarter basis to see some of these opportunities. We just want to make sure that our shareholders do, because things are turning behind the scenes and the engagement we've had from all market participants, but especially banks has been, we haven't seen this and probably the better part of two decades. So, it's something that we're very focused on and we do think that as the market stabilizes, you'll start to see more and more activity. And, again, I think what you've heard from most people, most of the file is that, we're looking for stability and rates. I think, even at these higher for longer levels, I think if there's stability, you'll start to see more and more housing activity. So that's that piece needs to come together for the market. And for us, we still have to take our lumps with fair value hits on portfolio assets that, frankly, are performing very well. But it is -- things are definitely evolving in the markets and keeping us busy.

Well look forward to 2024 and beyond. Thank you for the comments,

Thanks, Steve.

Thank you. Our next question comes from Eric Hagen with BTIG. Please go ahead.

Hey, thanks. How are we doing? Maybe just a couple more on the jumbo. Was there a mark-to-market impact from interest rates for the jumbo loans that are held for investment? How did that contribute to performance? How sensitive? Would you even say that that portfolio could be even further backups and interest rates from here? And then if you guys wanted to add capital to the jumbo business, like where do you think you'd source that incremental capital from like, which bucket would you maybe take it from? And how much liquidity do you think you consumed when you really start to scale up the jumbo pipeline?

I can start, Eric and feel free to chime in. The margins that we reference on the quarter and making mortgage banking income were all inclusive of any fair value changes on the loan pipeline. But in my prepared remarks, I mentioned, we were hedged with TBA, this quarter, which was a significant tailwind for us in terms of how that book performed over the course of the quarter. And so, our interest rate risk management was really notable on the quarter in the right way. In terms of additional capital to fund that business, that is one of the asset classes, that really is squarely underscoring the remarks that Chris and Dash made around private capital interest in our platform. The private market is certainly paying a premium for the quality of collateral that we're buying today and sourcing, as reflected in the execute execution of our securitization, but also in the breadth of discussions that we're having around folks interested in partnering with us on aggregating jumbo today. In addition, I would say just regular way of bank warehouse demand continues to be really strong for that kind of collateral and the advance rates that we're seeing are reflective of that today, too.

Okay, great. Thank you, guys.

Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. On the -- you mentioned, and I would recover in the fourth quarter, what's the specific driver of that?

Yes, the main item that drove the decline in interest income on the quarter was really a one-time reversal of prior quarter interest. And that was on our nonaccrual loans. I would note that, our -- what we call our nonaccrual loans is a broader list of just our 90-day bucket and really doesn't have anything to do with our view on recoverability. It's been fairly formulaic to date. And so we -- a lot of that $6 million decline that was from a prior quarter reversal really and our view remains recoverable today. And so, as we look out to Q4, we really expect it and I would more roughly approximately what we saw in Q2.

Go ahead.

Sorry, one other thing. I just note that, a lot of what we talked about our prepared remarks is really strategically rotating capital from the third-party investment portfolio and operating businesses and so you'll continue to see a shift from us in terms of income generated from NII relative to noninterest income. And that was apparent on the quarter, our mortgage banking businesses saw noninterest income up, almost 3.5 million. So that will be a shift that will continue to play out as well.

Got it. And then just one follow-up for me on the Aspire product is that purely equity? Are there any secondly in there, and how do you foresee that flowing through the P&L and impacting margins?

Yes, to date that is only the true equity products that we've been talking about. We are focused on closing seconds as well in other home equity products that just generally speak to what we view as a massive opportunity in the home equity space today. But that, those all flow through investment fair value changes. Like our other options that we have on balance sheet today from some of the other third-party originators.

Got it. Thanks for taking my questions.

Thank you. As there are no further questions, that concludes the conference of Redwood Trust, Inc. Thank you for your participation. You may now disconnect your lines.